I'm the environment editor at Forbes. Before joining Forbes in April 2011, I wrote about all things green and tech as a contributor to The New York Times, a senior editor at Fortune and an assistant managing editor at Business 2.0 magazine. I previously was the business editor at the San Jose Mercury News and during the (first) dot-com era served as a senior writer and senior editor at The Industry Standard (RIP).

The Asset-Backed Security On Your Roof

In the current issue of Forbes, I write about moves by solar companies SunRun and SolarCity to bundle leases for residential photovoltaic arrays into asset-backed securities that can be sold to pension funds, insurance companies and other institutions seeking long-term investments that generate steady cash flows.

As state and federal subsidies for installing rooftop solar systems are expected to decline in the coming years, these startups see solar securitization as way to secure a cheaper and more stable source of financing. In recent years, solar leases have exploded in popularity as many homeowners prefer to make small monthly payments over a 20-year contract rather than buy a rooftop solar system that can cost $30,000 or more.

“We’re moving from just looking at how to attract enough capital to continue our growth to how to attract a more efficient source of capital,” says Ben Cook, vice president of project finance for SolarCity in Silicon Valley. “It’s going after a different type of investor that has traditionally been possible.”

Chris DiAngelo is a securities lawyer at Katten Muchin Rosenman in New York who is working with SunRun, a San Francisco solar installer and financier that has been leading the charge for solar securitization.

“A lot of people, when they hear securitization and asset-backed securities, they get freaked out,” says DiAngelo, referring to the subprime mortgage debacle. “But if you look at asset-backed securities and the technique, it has held up fine for auto loans, commercial loans and equipment leasing.”

So just how good a bet will solar securities be when they hit the market sometime next year?

Cook and Edward Fenster, SunRun’s chief executive, say they only lease solar arrays to customers with high credit scores.

“There hasn’t been a race to the bottom to get people to sign solar leases who can’t afford them or put solar where it will not perform,” says Mac Irvin, chief financial officer for Sungevity, an Oakland, California, solar installer. “These will be very high-value securities. The default rate of our peers is miniscule.”

Bill Heskett, managing director of asset-backed securities for Bank of America Merrill Lynch, is also bullish on solar securitization. “The companies target a very high-quality credit consumer and the equipment they install is good for customers because it lowers their electricity bill,” he notes.

Which is not to say solar securitization doesn’t face hurdles. As I note in my magazine story, rating agencies, still reeling from their role in abetting the subprime mortgage crisis, must be persuaded to get onboard. And Irvin expects solar securities to initially command a premium interest rate to offset risks associated with startups without long track records and a technology that isn’t as easy to assign future value to as such things as a Honda Civic or a Boeing 737

Residential solar leases currently are financed by tax equity-funds created by banks (and most recently, Google.) In exchange, the financiers take a 30% federal tax break for renewable energy systems. But the current incentive tax credit is set to expire in 2016.

“You’ll see an increasing cost of capital between those companies like SunRun that are able to access these [securities] markets and other companies that don’t have the scale to do that,” says Fenster. “It benefits consumers because we’re able to raise capital at a lower cost and offer power at a lower cost.”

Adds Cook, “It’s important to show that as an industry we’re just not sitting around waiting for handouts.”

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Great piece. The next logical step would be biodiversity-backed securities; biodiversity asset-class bundles and leases. If equity pundits can put a biological bundle together in time for the next U.N. Climate talks in South Africa, a lot of people will be listening, particularly those with mid-and long-term horizons (large endowments and pension funds, for example).

Maybe we need to create a GSE type entity for the solar industry like we do with Fannie and Freddie for the housing industry. That way we can provide cheaper long term funding through guarantees on these asset backed securities.